There are three strands to this, that I will now attempt to hamfistedly summarise:
Firstly, the cost of copying has dropped to zero, which removes value from big chunks of the chain involved in the reproduction and distribution of digital things. [That's Kevin Kelly]
Second, this leads to new business models that either use the free things to cross sell other things that still have value [i.e. are scarce], or create money by charging someone else access to the end user or aggregated data of users [i.e. advertisers]. [That's Kevin and Chris Anderson]
Thirdly, when we see something that says FREE we get excited and go a bit mental and therefore act irrationally. [That's Dan Ariely]
The study of post scarcity economics, a kind of sci-fi pseudo science, is called algamics.
[This is a contradiction in terms, since economics is the science of scarcity, but nevermind that for now.]
One of the models of how an algamic economy works is based on the idea of reputation.
In the very excellent Down and Out in the Magic Kingdom [a sci-fi work better described as a novel of ideas] by Cory Doctorow, one of the big thinkers of the web/world, reputation becomes a form of currency called Whuffie, which overcomes/addresses the core problem: reputation is a social construct and social and commercial things don't play well together.
The web is already a reputation economy. It always has been. Open source hackers don't build bits of Linux for money - in fact, if Linus had offered to pay, it's unlikely Linux would have taken off. They do it for reputation.
The value of reputation is core to the idea of brands - brands are a manifestation of a company or product's reputation - the bits in people's heads, the intersection of what the brand says, what the world says, and personal experience of it.
[You knew that was coming right? I can't help myself.]
One of the things that reputation helps with is social gravity - the amount of people that collate around a brand [or person], the strength of its attraction. The greater the reputation, the larger the social gravity, the larger the influence and support network.
This is the value of free: when you give things away, you indirectly increase your social gravity.
Richard Laermer, CEO of a PR firm, just gave away his newly published book 2011 for free, like Cory before him. It also looks at FREE as a future business model, so making it FREE seems apt. The bits I read seemed charmingly vitriolic, but I quickly grew tired of the flash page turning web reader thing. Chapters by email please [each one is very short - ideal for serialisation].
Anyway, as I've said before, because of the issues with screen reading, giving books away online is good sense - in this case it is eminently sensible: the function of the book is a] to increase his social gravity and the currency of his opinions and b] to attract more business to his firm [Rather than to sell lots of books].
But the key thing here is that this is an INDIRECT effect - which presents a problem for brands following the model.
Think about this as the difference between gifting and barter. When you give a gift to many people, like a free e-book or presentation on slideshare, you increase your reputation, your social gravity, but you DO NOT expect a direct return, otherwise it is barter.
Now, when brands want to use the social grammar of gifting to make people like them, and they should because it's nice, they come up against an issue of ROI - if you expect people to buy something there and then when they get your gift - IT STOPS BEING A GIFT, which replaces social grammar with commercial, and counteracts the effect.
[This effect, where commercial grammar overrules social grammar when both are employed is detailed in Predictably Irrational - it further supports Feldwick's view below in the sense that specific product messages would frame communication as commercial and therefore negate the development of social relationship building, or brand preference.
This is probably contentious, but it suggests that if you attempt to employ any rational messaging in brand building communication, you might well be shooting your brand in the foot.]
Of course, everyone knows that the relationship a brand wants with them is commercial - but out of sight is very much out of mind.]
The social value of a gift is dictated by a few different factors - the care and attention with which it has been chosen to be valuable to the recipient, and, in another way, what it says about the giver's taste, expertise and largess.
Being nice indirectly increases a brand's social gravity, which pulls more people into their sphere, or, to use annoying marketing speak, puts the brand into their consideration set, and says something about what they care about, what they are experts in, and so on.
This indicates that any attempt to measure the short term sales response to brand related initiatives is fallacious, which is obvious, but this is very difficult to deal with when markets require quarterly results, and financial directors want to see dollar for dollar returns on their investment.
[Another way of thinking about this spend is as production cost - as in the cost of creating the symbolic value that makes your product more desirable than others that are exactly the same - which should therefore be factored into the pricing and profit model of production, but let's not get into that now.]
If you want people to like you, and you give them a gift, you offer something free, you can't ask for anything in return.
[Even if it's Christmas.]
You just have to hope that next time they are looking for something you make, they remember you were nice and understood what they needed and buy yours.